Pioneer Square Labs has raised $100 million for its second fund, a key milestone for the 5-year-old Seattle firm that combines a startup studio with a venture capital fund.
Fund II: PSL planned to raise $80 million. But demand from existing institutional investors drove the extra cash. It added new backers and diversified its limited partner base for the second fund. The PSL team will invest the $100 million across more than 30 early-stage companies in the Pacific Northwest, writing initial checks in the $1 and $3 million range.
The model: PSL launched its startup studio in 2015, aiming to come up with ideas, match them with an entrepreneur, and spin out companies. The studio itself has raised $29 million to date. PSL raised $80 million for its first early-stage fund, called PSL Ventures, in 2018. That gave PSL flexibility to back up-and-coming startups that don’t go through its studio. The fund allocates about half of its cash for companies with no prior connection to PSL Studio, and the other half in PSL Studio spinouts. (PSL does not lead those investments; Managing Director Julie Sandler says this minimizes signaling risk for founders).
We invest in startups all over the PNW (co’s that have no prior connection to our studio). We also participate in financings other investors lead in studio co’s. Partnering w/ founders through both PSL Ventures & PSL Studio is seriously the greatest joy of our professional lives.
— Julie Sandler (@juliesandler) March 4, 2021
Track record: The studio has spun out 25 companies in five years, including six over a six-month span during the pandemic. The spinouts represent about 15% of all early-stage technology companies that have raised venture capital in Washington state over the past year. Only one portfolio company has raised a Series B round or later.
Investment thesis: “We love this region, we love this community,” Sandler said of the Pacific Northwest. PSL focuses on three main themes: machine learning and engineering innovations, digital transformation of consumer habits, and shifting legacy verticals to the cloud.
Equity debate: Some are critical of the startup studio model, saying firms such as PSL take too much stock ownership from founders, increasing dilution and potentially dissuading future investors. PSL last month declined to provide a specific breakdown on how much equity the studio takes from spinouts. A survey conducted by Global Startup Studio Network found that startup studios take on average a 34% equity stake when a company is founded. For comparison, a lead investor in a Series A round typically wants 20% of the company, according to Silicon Valley accelerator Y Combinator.
The team: PSL’s 22 employees include some of the region’s best known investors, including Mike Galgon (formerly of aQuantive); Geoff Entress (a longtime angel investor); Greg Gottesman (formerly of Madrona Venture Group); T.A. McCann (a serial entrepreneur who has sold companies to Google and RIM); and Ben Gilbert, who previously co-founded Madrona Venture Labs and was promoted to managing director as part of the new fund.
PNW $$$: PSL is the latest Seattle-area tech-focused firm to raise a new fund as investors increasingly turn their attention to the Pacific Northwest. Founders’ Co-op — an early backer of Auth0, which announced a $6.5 billion acquisition Wednesday — this week revealed a $50 million fund. Fuse Venture Partners and Flying Fish Partners are also raising new funds. Madrona Venture Group, the largest VC in the region, raised $345 million for its 8th fund in December. Sandler, Gottesman, Entress, and Gilbert previously worked at Madrona.
Go deeper: Check out our deep dive on PSL last month.